The World of Medicinal Cannabis
I have recently had a lot of people asking me if they should buy a Medical Marijuana company in their Super Fund so I thought we should initially take a look at the industry, regulatory environment and key players.
The acceptance of medicinal cannabis is increasing globally, with Australia also trying to play its part by recently approving the legal importation of the ‘drug’ by companies to meet demand. While we recognise the overall positive long-term trends in the sector, investment opportunities available to investors presently are still in their infancy .
What is medicinal cannabis? The most relevant components of cannabis, which hold significant health benefits, are Cannabidiol (CBD) and tetrahydrocannabinol (THC). CBD is considered to have a wider scope of medical applications than tetrahydrocannabinol (THC), and with more appealing treatment options for patients seeking anti-inflammatory, anti-pain, anti-anxiety, anti-psychotic, and/or anti-spasm effects without any psychoactive effects.
Current regulatory environment in Australia. The use of cannabis is illegal in Australia however certain amendments were made to the Narcotics Drugs Act 1967 which allowed the production of cannabis for medical or scientific purposes. Recently, the Australian government approved companies to import, store and sell the drug to meet demand, which provides further validation for its use and in our view sets the tone for the future. We would regard the US market among the global leaders in driving the commercialisation of medicinal cannabis. At present, the use of marijuana for medical purposes is legal in 29 states. As well as 30 countries worldwide including Canada, Colombia, Croatia, Germany, India, Italy, Macedonia, Poland, Puerto Rico, Uruguay, Spain and Turkey.
Significant growth opportunities. While there are many official and unofficial numbers being quoted, it is safe to say the global opportunity is significant. In a story reported by the International Business Times, they put a value of the entire global medical cannabis industry at US$250bn in 2016. Further, it is the integration of cannabis into the adjacent markets, such as cosmetics (US$255bn p.a.) and medical devices (US$300bn p.a.), which could see the overall global opportunity be 2 to 3 times more than the current reported market size.
Investment opportunities still in speculative stages. All the cannabis related stocks listed on the ASX are early stage and have no positive earnings. Accordingly, while the overall industry appears to have a bright future investors should regard them as highly speculative.
Key risks facing the industry. We see the following as the biggest risks to the sector: (1) illegal use of the drug and its proliferation leading to tighter regulation impacting the earnings of the wider legal sector (illegal impact); (2) illegal use of the drug having a negative impact on the wider community leading to negative sentiment towards the drug (social impact); (3) clinical trials leading to adverse results or lack of efficacy, which may show more harm than good by its applications; (4) new capital allocation to the sector will see competition rise and this could also result in un-economical companies/business models taking advantage of investor enthusiasm in the sector.
What is medicinal cannabis?
Cannabis is not a single chemical but is reported to have over one hundred unique chemicals which are believed to have medical benefits. These chemicals are called cannabinoids. The most relevant components of cannabis, which hold significant health benefits, are Cannabidiol (CBD) and tetrahydrocannabinol (THC).
Figure 1: Key components of the cannabis plant
Source: MGC whitepaper
CBD is considered to have a wider scope of medical applications than tetrahydrocannabinol (THC), and with more appealing treatment options for patients seeking anti-inflammatory, anti-pain, anti-anxiety, anti-psychotic, and/or anti-spasm effects without any psychoactive effects.
Figure 2: Cannabis medical applications
Medicinal cannabis refers to the use of the cannabis plant in the treatment of diseases and symptoms, such as chronic pain, chemotherapy induced nausea, multiple sclerosis symptoms, epilepsy and post-traumatic stress disorder (PTSD).
Multiple Sclerosis (MS). Initial research from recently published whitepapers suggest the use of cannabis oil everyday can help multiple sclerosis sufferers return some normality to their lives. MS sufferers experience pins and needles, electric shocks, nerve pain impacting ability to walk and loss of sensation.
Epilepsy. According to the World Health Organisation (WHO), epilepsy is one of the most common neurological diseases. According to research, 25,000 people are diagnosed with epilepsy each year, which often include children.
Chronic pain. Anecdotal stories suggest that sufferers of severe chronic pain have greatly benefited from using medicinal cannabis, which allowed them to sleep better and resulted in an improved diet.
In recent years, the largest hurdle marijuana has faced is the negative connotation or reputation (illegal and recreational drug use) that was associated with it. However with research and clinical trials in train along with increased community education, the medical fraternity and wider community are beginning to appreciate it as an effective medical treatment.
Global view on cannabis…from a legal standpoint
In this section, we provide a quick overview of what the legal landscape looks like in key regions. The map below provides a quick snapshot of where cannabis is legal.
Figure 3: Where is cannabis legally accepted?
Australia. The use of cannabis is illegal in Australia; however certain amendments were made to the Narcotics Drugs Act 1967 which allowed the production of cannabis for medical or scientific purposes. Recently, the Australian government approved companies to import, store and sell the drug to meet demand, which provides another validation for its use and sets the tone for the future. Both NSW (1 Aug 2016) and QLD (1 March 2017) have passed legislation for doctors to be able to supply medicinal cannabis.
Israel. Israel is among the leaders in the world, with a well developed and regulated cannabis sector and research programs into medical cannabis.
USA. We would regard the US market among the global leaders in driving the commercialisation of medicinal cannabis. From our understanding, the use of marijuana for medical purposes is legal in 29 states, with California leading the way with respect to medicinal cannabis patients, however it remains illegal at the US Federal level. Other states are also looking to pass laws which will allow CBD only medical cannabis regulations. According to various industry commentators, by 2020 up to 40 states in the US could have favourable laws. Legislation is being introduced to classify marijuana at Schedule II drug (as opposed to Schedule I drug – e.g. heroin) so that it is accepted for medical use and exempted from federal prosecution.
Canada. Under its current regulation, Marijuana for Medical Purposes Regulations (MMPR) – companies can produce marijuana for commercial purposes if they comply with stringent safety and quality demands. Under this regime, around 23 licences have been issued, which will allow the producer to supply directly to patients. Health authorities in Canada estimate that the total number of patients using medicinal cannabis is likely to grow to 450,000 by 2024 (versus current approximately 55,000).
Europe. European regulation as a whole is still in its infancy stage. It is likely to come as no surprise to those who are well travelled that Amsterdam in Netherlands could be called out as the pioneer in the region. The main supplier to the European region is a Dutch company called Bedrocan. However, others nations are also looking to deploy cannabis programs: the Czech Republic is launching cannabis programs for growers; Italy is looking to grow supply in secured locations. The main delivery method is via prescriptions from neurologists and distributed via regulated pharmacies or dispensaries. The European market is estimated to grow by 15% per annum to 2018.
Putting numbers around the global opportunity…
It is worth noting that the global cannabis opportunity needs to be considered in terms of what the expenditure is in the regulated market and un-regulated market (i.e. the black market).
USA. It is estimated that the size of the medical cannabis market in 2015 was approximately US$2.0bn, with the regulated recreational market estimated to be worth US$1.0bn. Further, the black market is estimated to be around US$60.0bn. Industry research has suggested that the market could grow by 30% per annum to become a US$15bn industry by 2020, with recreational cannabis experiencing similar sort of trajectory.
Canada. Official forecasts predict that approved patients will grow to 1.2% of the total population in 10 years. Industry predicted to grow at a compound annual growth rate of 25%-28% to more than 400,000 patients and $1.4bn market in 2024.
Europe. Medical cannabis is currently imported (in small quantities) from the Netherlands and used by patients in 10 European countries. The largest markets are: France, Italy, Netherland and Romania.
Cannabis related companies listed on the Australian Stock Exchange
The table below highlights the key players listed on the ASX, IPO date and share price performance since listing (given most of them have a relatively short trading history). As the table below highlights, the companies’ share price have performed strongly, however investors should note the companies presently have negative earnings.
Source: Redleaf, Bloomberg; LTM = last 12-months earnings per share; share price as at 20/3/17
AusCann Group (AC8) – Incorporated in September 2014, AC8 aims to produce high quality, economical and clinically validated cannabis medicines in Australia and for export market such as the United States. The Company is undertaking research into the medicinal cannabis industry and entering into relationships that can assist in achieving its objectives. The Company’s first harvest in Chile is on track for April 2017, which is intended to be sold to third parties for use in a range of clinical trials. Successful results from these trials could lead to product registration and commercial sales.
Botanix Pharmaceutical (BOT) – Botanix is a medical dermatology company using a novel drug active and proven drug delivery technology to develop prescription treatments for serious skin diseases, including acne, psoriasis and atopic dermatitis. It has licensed a novel drug delivery technology known as Permetrex which is designed to deliver pharmaceuticals into the skin more effectively than other approaches. Botanix is preparing for the first human trials delivering synthetic cannabidiol to the skin. The Company is the first firm to develop synthetic cannabidiol for skin diseases.
Creso Pharma (CPH) – CPH is involved in the development of cannabis and hemp-derived therapeutic-grade nutraceuticals and medical cannabis products with a broad range of applications in both human and animal health. The Company holds worldwide rights for a number of proprietary innovative delivery technologies which enhance the bioavailability and absorption of cannabinoids. It was recently announced that CPH’s subsidiary Hemp-Industries (HI) received regulatory approval in the Czech Republic for its new range of hemp extract-based, THC free products called diCBDium.
Medlab Clinical (MDC) – MDC is a medical research and development facility researching and formulating novel bio-therapeutics (nutraceuticals and pharmaceuticals) to improve health outcomes in early to moderate stage chronic diseases such as chronic kidney disease and pre-diabetes/obesity. The Company is currently running 5 core research programs, which are at various stages of investigation. MDC is looking to create innovative new medicines, such as medicines derived from bacterial metabolites and bioavailable cannabinoids for the management of pain associated with cancer, HIV/AIDS and chronic disease.
MMJ Phytotech (MMJ) – MMJ aims to commercialise medical grade cannabis and high potential cannabis based therapeutics products to the rapidly growing international market with regulated medical cannabis laws. The Company operates three subsidiaries with operations across the entire medical cannabis value chain, encompassing the MMJ’s “farm to pharma” strategy.
MGC Pharmaceuticals (MXC) – MGC is an EU based specialist medical cannabis company, with the aim to develop and supply high quality non-psychoactive cannabidiol resin extract for the growing demand in cosmetics and medical markets in Europe, North America and Australasia. The Company recently completed a placement of A$10m, which was significantly oversubscribed. The funds raised will accelerate the commercialisation of the MXC’s growth objectives, including the research and development of pharmaceutical-grade products.
Zelda Therapeutics (ZLD) – ZLD is developing medicinal cannabis therapies in collaboration with a number of key international leaders and research organisations. The Company has exclusive license to Aunt Zelda’s patient data set of over 500 patients gathered over several years Zelda designs clinical trials using established formulations and protocols. Aunt Zelda’s is a pioneering Californian company founded in the medical cannabis field.
The Hydroponics Company Ltd (THC). The Hydroponics Company Ltd (THC) will be listing on the Stock Market on approximately 20th April and aims to become a global leader in the cannabis industry, through the development and delivery of medicinal cannabis, manufacturer and distributor of hydroponics equipment, materials and nutrients and large-scale hydroponic greenhouse design and construction. The business will have three main segments – (1) IP Research and Development; (2) Hydroponic Equipment; and (3) Greenhouse Design, Construction and Management.
The seeds have been planted and our future updates will show which ASX listed companies will be the growers.